Sunday, January 25, 2009

Book Review: The Forgotten Man: A New History of The Great Depression

Amity Shlaes, author of The Forgotten Man, is a classically trained (capitalist as opposed to Marxist) economist, and so has great insight into the policies employed to address the economic crisis following the stock market crash of 1929. This insight, plus the lively detail she puts into her history of the 1920s to the early 1940s, makes this book required reading for students of history, government, and economics. It also needs to be read by the Obama administration as it struggles to cope with the current recession.
Shlaes begins her narrative by talking about a desperate time--one where businesses were failing and people were committing suicide in the face of desperate economic straits--that time was not 1930, but 1937, after the New Deal had already been in place for five years. During this introduction, the author states her thesis regarding the extended length of the Depression. Rather than focusing on the Smoot-Hawley Tariff or the Dust Bowl or Hoover's attempt to force wage increases or tax increases during a period of economic hardship, Shlaes emphasizes that "the intervention, the lack of faith in the marketplace," which in previous downturns had always recovered through minimal government interference, was hindered by intensive government manipulation of market mechanisms.
Going back to the 1920s, Shlaes then contrasts Hoover (who was Commerce Secretary) with his boss of the time, Calvin Coolidge. While Coolidge was a hands-off administrator and a believer in capitalism, Hoover, an engineer, believed that the economy could do even better when tinkered with or directed by the government. In times of crisis, Hoover further believed that government had the right and duty to set things right again.
Elected in 1928, in part due to his ability to marshal federal resources to help the Midwest recover from a flood of the Mississippi, Hoover set the tone that FDR was to take to greater extremes when he took office in 1932. In hopes of protecting American jobs, Hoover signed off on the Smoot-Hawley tariff, a tax on imported goods that caused other nations to raise their own import duties in retaliation. Next, to curb inflation (the primary concern of most 20th century economists), Hoover pushed the Federal Reserve to tighten up the money supply by raising interest rates. This "tight money" policy created a state of deflation, making money hard for businesses and individuals to obtain. Some cities even turned to creating non-dollar-based scrip or bartering to keep their local economies moving. Hoover also pushed for public works programs to increase employment, through such programs as the Boulder Dam, more commonly known today as Hoover Dam. All of these actions came together to ensure that Hoover remained a one-term president, and usually one of those that Democrats today hang around the necks of Republicans as a symbol of failure. However, Roosevelt would make his own interventions, and those, too, would interfere with recovery.
When FDR took office in 1933, an incredible 25 percent of the American workforce was unemployed (compare this, say, to the 10.3 percent unemployed during the early years of the Reagan administration or the paltry 7.2 percent unemployment we're experiencing today). FDR was a new political animal, an old-money aristocrat who dared to war on his fellow aristocrats, a liberal who emphasized group rights at a time when classical liberalism still emphasized individual rights. FDR's rhetoric also changed the context of previous economic theory. Consider these two conceptions of "the forgotten man," from which the book takes it title: opposed to its original context...
"These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensible units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid."
--Governor Franklin Roosevelt of New York, 1932

"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X...What I want to do is look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of...He works, he votes, generally, he prays--but he always pays.
--William Graham Sumner, 1893
Again, Shlaes wants the reader to understand the changes FDR made to the traditional relationship between government and business. Prior to the 1930s, Washington was a quiet city, with a budget much smaller than many or most businesses nationwide. Its power was limited, and the public expectations of the federal government likewise remained limited. FDR would change all that, and more.
Roosevelt was one of the first mainstream American politicians to engage in "class warfare," a method usually practiced by socialists, wherein labor was set against "capital" (management), and goverment was expected to make capital pay for its misdeeds toward labor. In providing direct aid to poor blacks, FDR also shifted that voting bloc, which from the time of the Civil War had been reliably Republican, to the Democratic Party.
FDR pushed for higher taxes on big business, government management of electrical power, and government regulations of everything from consumer choice to labor wages. He approached market capitalism with confident skepticism and moral disdain. Shlaes also highlights his willingness to tinker with the economy, sometimes because he didn't know what would work, and sometimes just to irritate political rivals. Inverting traditional American assumptions of the time, FDR did what he could to restrict the power of big business under the assumption that "bigness" or success were obvious signs of corruption or unfair dealings. When big businesses were profitable, FDR established higher corporate tax rates to punish "excess profits." When corporations refrained from investing--out of fear of having their businesses nationalized or made unprofitable through government intervention--he created an "undistributed profits" tax to ensure that the federal government got its share regardless.
The problem with all of these interventions, regardless of the rhetoric used to justify them, was that they scared private enterprise from performing its usual function, which was to invest in new businesses, develop new products and services, and thereby create jobs. The government's tinkering exascerbated the very uncertainty they were supposed to overcome. According to Shlaes, the New Deal created many disincentives to typical economic activity and many perverse incentives to prevent the very activity they were supposed to help create.
One item in this book that was eye-opening to me was that government spending on World War II was only half of the equation in getting America's economy out of the Depression. Roosevelt also ceased his war on big business, allowing the economy to grow sufficiently to build the "Arsenal of Democracy." While Shlaes doesn't say so specifically, this seems to be pretty conclusive proof that Roosevelt was well aware his interventionist prescriptions were harming the economy, and that he stopped them only as a tool of national survival. Unfortunately, it might take a similar crisis to keep the current government in Washington from interfering in the market further.
There are other smaller stories within the greater narrative of The Forgotten Man that deserve attention, like the community- and individual-level self-help groups formed by characters like "Father Divine," a black preacher in New York, and Bill Wilson, the famous "Bill W" who created Alcoholics Anonymous. Shlaes also gives the reader insight into the behaviors of the political and big business magnates of the time, whose names are still familiar to us today: J. P. Morgan, Henry Morgenthau, Felix Frankfurter, Harold Ickes, Andrew Mellon, and Alexander Forbes. All of these stories flow as unique side trips along the great current of history that was the Great Depression, and they help a new generation understand what can go right and wrong when government attempts to help a nation out of economic troubles.

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